Welcome to Methode Electronics Fiscal 2016 Second Quarter Earnings Conference Call. At this time, all participants are in a listen only-mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. This conference call does contain certain forward-looking statements, which reflect Management’s expectations regarding future events and operating performance and speak only as of the date hereof. These forward-looking statements are subject to the Safe Harbor protection provided under the Securities Laws. Methode undertakes no duty to update any forward-looking statements to confirm the statements to actual results or changes in Methode’s expectations on a quarterly basis or otherwise. Forward-looking statements in this conference call involve a number of risks and uncertainties. The factors that could cause these actual results to differ materially from our expectations are detailed in Methode’s filings with the Securities and Exchange Commission, such as our Annual and Quarterly Reports. Such factors may include, without limitation, the following: dependence on a small number of large customers, including two large automotive customers; dependence on the automotive appliance, computer and communications industries, investment in programs prior to the recognition of revenue; ability to withstand price pressure; including price concession, currency fluctuations; timing, quality and cost of new program launches; dependence on our supply chain; dependence on the availability and price of raw materials; customary risks related to conducting global operations; income tax rate fluctuations; fluctuations in our gross margins; the recognition of goodwill impairment charges; ability to keep pace with rapid technological changes; ability to compete effectively; ability to successfully benefit from acquisitions and divestitures; ability to avoid design or manufacturing defects; ability to protect our intellectual property; location of a significant amount of cash outside of the U.S.; ability to withstand business interruptions; a breach of our information technology systems; and costs and expenses due to regulations regarding conflict minerals. It is now my pleasure to introduce your host, Don Duda, President and Chief Executive Officer of Methode Electronics.

Thank you, and good morning, everyone. Thank you for joining us today for our fiscal 2016 second quarter financial results conference call. I’m joined today by Doug Koman, our Chief Financial Officer; and Ron Tsoumas, our Controller and Treasurer. Both Doug and I have comments and afterwards we will take your questions. Revenues for the fiscal 2016 second quarter decreased 9.3% and in the first-half declined 8.1% with lower sales in all segments, most notably our Power Products. Net income decreased in both periods affected mainly by lower sales in the corresponding manufacturing inefficiencies, but was also impacted by increased legal fees, particularly related to Hetronic, as well as higher professional fees, wages, benefits, severance, stock award compensation, and amortization. The first-half was also negatively affected by costs and inefficiencies due to the transfer of Interface manufacturing from the Philippines to Egypt in the first quarter. Probably offsetting these unfavorable factors of both periods were lower bonus expense, a lower effective income tax rate, favorable foreign currency translation for raw materials and labor costs, favorable raw material commodity pricing, and increased production in Egypt. Consolidated gross margins as a percentage of sales declined 180 basis points in the second quarter, but improved 70 basis points for the first-half. In both periods, gross margins were negatively impacted by manufacturing inefficiencies related to decreased sales, while the first-half was also affected by the transfer of Interface manufacturing from the Philippines to Egypt during the first quarter. Consolidated gross margins were positively impacted in both periods by favorable currency impact in raw materials and labor costs, favorable commodity pricing of raw materials, and increased production in Egypt. Year-over-year, second quarter and first-half selling and administrative expenses were negatively affected by higher legal, professional services, severance, wage, benefit, stock award compensation, and amortization expenses,…

Thank you, Don. Good morning, everyone. Looking at the effective tax rate, for the six-month period, the tax rate was 22.7%. This is lower than the 23.9% used in the first quarter, and this is due to our updated guidance and the change in the amount of expected taxable income in each of our jurisdictions. For guidance purposes, the annual effective tax rate is in the low to mid-20s, dependent upon where the taxable income is expected to be generated at each end of the guidance range. As Don mentioned earlier, we repurchased and retired just under 711,000 shares in the second quarter at the average price of 31.99. The $22.8 million used for the repurchase came from borrowings under our credit facility. In the six months period, the reduction in shares resulted in less four-tenths of 1% improvement in EPS. If there were no further repurchases made during the fiscal year, the expected benefit to full year EPS could be just under $0.02. In the second quarter, the company awarded performance-based RSA and RSU’s to key employees. While included in our original full-year guidance, the amortization expense during the first-half of fiscal 2016 was 800,000, all of which occurred in the second quarter. During the last six months of fiscal 2016, we expect the expense related to these RSA’s and RSU’s will be about $4.7 million, and that would be nearly $0.05 per share in each of the third and fourth quarters. In the first-half of fiscal 2016, we spent $9.5 million for capital expenditures. For the full-year, we expect capital spending to be between $20 million and $25 million. This is down $5 million at both ends of the prior estimate. Depreciation and amortization expense in the first six months was $12 million. For the full-year of fiscal 2016, we expect depreciation and amortization to be between $23 million and $25 million. This is in line with our prior estimates. EBITDA for the six-month period was $69.3 million, or nearly 17% of sales. Based on our fiscal 2016 guidance, we expect EBITDA to be in the 16% range and be between $128 million and $134 million for the year. And lastly, for the six-month period, free cash flow was $47.2 million. Based on our revised guidance, we expect the free cash flow for the year to be between $83 million and $87 million. That concludes my comments. Ron, I will turn it back to you.

Thank you, Doug. Manny, we are prepared to take questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Steve Dyer of Craig Hallum. Please go ahead.

Thanks. Good morning, guys.

Good morning, Steve.

If you dig into power a little bit, I know there’s certainly been some pressure on the data center business, but can you give us maybe any indication of whether customers or end markets that are seeing pressure therein, maybe additional color if these are just order push outs or if you have lost orders or how you kind of think about that business going forward?

Okay. We’ve not lost business. I can’t really point to any customer that has transferred a business to anyone. In the normal course of business “you win” and “you lose” but in terms of current customer deflecting some place else, to our knowledge we don’t know of any. But what we do know is our industrial customers and oil and gas are considerably down, and these are notable customers that have been in the press saying that their businesses are down. So, it is somewhat across the board and power, and at this juncture and then we know some of our peer companies and competitors and for the most part we are saying what others are saying, so it is our industrial downturn if you will that’s been talked about. No, we don’t do business with Caterpillar per se, but they have talked about this as well as others. So, this is one of those where we make our infrastructure adjustments and the necessary cost reductions, and this will be one that we’re going to have to weather. Because of our strength, we can be a little more aggressive in pursuing new business against perhaps some of our weaker competitors, but it is a – we are going from a record year last year, largely because of our big data customer to a significantly down year, I did mentioned earlier that we do expect big data to come back late in the fourth quarter. Again, it is not going to get back to the number it was last year, but it is a return.

Great, that’s helpful. And then as you hop over to Dabir, it sounds like a lot going on there in the testing and trials and so forth, is there any change there in terms of I mean, when you put it all together, what do you expect for a contribution, I think initially the hope was for a little bit maybe at the end of this fiscal year, how do you see that sort of ramping over the next couple of quarters?

For the next couple of quarters, we are going to continue to invest in Dabir. We have increased the spend this year, likely to increase it for next year. I am past the point of, is this a viable opportunity, yes it is. And it warns us of funding it appropriately, carefully and conservatively, but we are seeing tremendous interest across really all of those segments that I talked about, now we’re not going to pursue all of them, but we’re going to expand the product offering beyond just the surgical and ICU area. From a revenue perspective, we haven’t really said much on it, but we are targeting the group to – in our fiscal 2017 to have meaningful revenue just to prove the business out. I think that comes towards the end of 2017. The design-in, I think we have said this before, does take longer, particularly when it is going into the operating room, hospitals are very careful. So, we are -- four to six months timeframe is what we are seeing now for a doctor, but we are seeing more hospitals do trials. So, we are conservative, but we are optimistic on where Dabir is headed.

Okay. And then finally as it relates to the center stack opportunity, what are you seeing out there in terms of bidding, it doesn’t sound like getting new awards on this call, anything changing there?

No new awards in this call, but we are tracking several opportunities, I won’t say into the final rounds, but into the point where we are getting more confident of an award we generated and obviously we don’t talk about them for competitive reasons, but we actually have them, but I just had to review with our sales people not too long ago and a number of good center-console opportunities are being tracked.

Anything sizeable out there, I mean obviously there is not much in the realm of the K2 business, I mean are there other things out there kind of 20 million and plus that you guys feel good about?

Yeah, that’s kind of highlighted, look at once you get past the mega programs which is not that many of them, the 30 million, 25 million, 30 million, 40 million is a good center-console win for us, and we are tracking several of those.

Okay.

We have a pretty good hit range. I mean, I don’t want to cut here my chickens here, but they are out there for us to, we are not going to get all of them, but we are going to get our share of them.

And then finally when you kind of put all this together, does this impact your EBITDA CAGR guidance for the next five years, is there anything that has deviated such that you don’t feel like that is reachable anywhere?

No, no. We remain very optimistic and not just Dabir, but auto continues to do well, the team does a great job of managing the launches and taking costs out and we have some help from currency and raw materials, but they continue to keep their scrap levels low and continue to knock them with flawless launches. So, continue to be optimistic about auto, or having a little bit on both drag and that’s one area where we will probably see a couple million dollar effect on sales, but not a huge customer. That’s one area that is perhaps a little weak, but made up by other opportunities in Europe. So, auto, we remain confident of, we will talk about Dabir, I won’t repeat myself there, our 10-gig product is out there, is being tested now by the customers, that’s actually a major milestone and if customers put these transceivers in other test labs they are going to – we are spending money to do that. So, we are optimistic there. So, in general health power is an issue, I will be more concerned if it has some product issue or internal manufacturing, it doesn’t. It’s in our market to markets that seem a decline and it is also in data and we’ve seen a decline there. So, there is nothing that changes my positive outlook for us going forward.

Okay, thanks. I will hop back in the queue.

Thank you.

Thank you. The next question is from David Leiker of R.W. Baird. Please go ahead.

Hi morning. This is Joe Vruwink for David.

Good morning Joe.

I wanted to follow up on the 10-G transceiver product, a few years ago when you started talking about it, I think you actually made business announcement where you thought you would have around $30 million in revenue within a year or two of that product’s introduction, is that still the revenue number to be thinking about, now that the product has actually launched.

Yes, that’s correct.

And so we should think about interface revenues over the next 12 months to 24 months basis in theory the $30 million higher just related to that product?

That would be correct, but that will erode our one gig product, so we will see some decline in that and we are seeing some of that already. So, that will be a gain, I want to see how many design-ins we get before we give more detail on that, but there will be a – certainly not a one for one offset, there will be some offset in the decline in our one gig product and we will give more detail as we get information from our customers and once we get through the testing phase then we will get more data from the customers what the revenue expectations are. Doug, do you want to add to that?

Okay.

No, no.

Okay, that that make sense. And then on your big data customer is signaling some intensive spend again by the end of this fiscal year. Is it fair to take that spending level and maybe think about a run rate in the fiscal 2017? And if I just extrapolate that for the overall power business, does maybe fiscal 2017 fall somewhere in between 2016 and 2015’s revenue levels and not getting back to peaks that are better level than what 2016 was that?

Well, at this point it’s probably a fairway of looking at it. But this particular customer is noted for being somewhat erratic in its take rate. So, we could see a very strong first quarter of next fiscal year and nothing until the fourth quarter. So we need to be careful there. But right now that’s a fair assumption and we’ll have more color on that as we get closer to launching that product.

Okay, great. And then my final question on the magnetoelastic technology, is there any way to frame the total market opportunity from all the different applications that product can go into? So, I believe, today you announced the first steering application. You’ve already announced roll stability, it sounds like transmission is viable. Have you thought about in total what a TAM or addressable market dollar figure might be for magnetoelastic?

If you take out automatic transmissions, because that’s a – if it gets adopted, it’s a huge number. Now that’s almost a business segment in itself over a five or eight-year period, it becomes standard, and then you can just model the number of automatic transmissions produced in some penetration. The non-automotive side and let’s take in transfer, it gives a off-roads application. If that is a total available market from what we see, we just add up the customers and look at what we could sell to each. They are not $50 million type customers, there’s $5 million here and $10 million there. You’re looking at maybe on available market that we know today of about a $100 million. And of which, we’re the only game in town. So depending on price and the application, we could garner a fair share of that and a very good margin, but it’s a eBike, I looked at eBike, for an example, that’s turning into $20 plus million opportunity for us at very, very good margins. It’s hard to get a total handle on it, and that’s just up – adding up what would you get from each customer. There could be some other application out there that we haven’t thought of that would generate more. But, again, the holy Grail is still the transmissions.

And what sort of progress have you made just quoting less under the tier one transmission assemblies on maybe getting a little taste of what that product can do in the application?

I don’t think we have anything to report other than what we’ve said in the past. We’re waiting for our first RFQ. And we’ll get much better understanding of where that can go or particularly with one customer once we have that. And, again, it is added to the cost of the transmission, so that’s a one type of a hurdle.

Okay, fair enough. Thank you, guys.

Thank you. [Operator Instructions] The next question is from Jimmy Baker of B. Riley. Please go ahead.

Hi, good morning, Don. Good morning, Doug.

Good morning, Jimmy.

Most of my questions have been answered. You provided a lot of good color so far. Just one clarification, I guess, did you quantify the impact of legal expenses on your Interface segment? I guess, I’m wondering how much of the $2.3 million jump there in SG&A was a function of incremental legal spend. And then what’s the total full-year expectation for legal expense in that segment?

Of that $2.3 million, I don’t think we gave the exact number, but a good fortune of that was related to interface.

Okay. And the full-year expectation, if you have it?

We’re looking it up. Full-year would be in a $11 million to $12 million range. And that could be less depending on what happens in the proceedings.

Okay. And where would you have expected that at the beginning of the year, I guess, I’m just trying to understand the impact of your guidance change?

We were modeling in the $7 million range at the beginning.

Okay, understood. And then from your earlier comments on, it certainly sounds like your confidence in Dabir is sort of steadily rising here, and you’re demonstrating your confidence with the increased investment strength. Could you maybe just clarify what specifically you are looking to accomplish with this increased spend? What mile markers we should look for? And then did I hear that you’re going to take steps at this point to evolve the product for additional applications?

We’re – my milestones for the prior lessons [ph] gives us more confidence is really the adoption rate of a hospital. So I think from a last call, we – this one we talked about several more hospitals that are doing trials. That’s what gives me confidence as more and more people adopt us. We’re not completely there yet. Our first hospital has moved in certain instances to the ICU, which we see very exciting, and it’s really the continuity of care. You can get through a surgical procedure without pressure ulcer, but then the laying in ICU or in the hospital room and then generate a sore. So hospitals are looking at continuity of care. So that – all of that starts to trail in more hospitals. I’m not talking 50 hospitals, it’s – I’d be very pleased if three, four or five hospitals that use us. And then I think I said in the past, once you get a hospital conglomerate to roll it out, then the snowball is rolling. So that gives me confidence. The amount of interest we talked about 800 leads and then we left out to 25, but there’s a lot in between there that are being worked that are very exciting. And then we’re at the point where we have the data necessary to develop product for outside of the hospital. I wanted to wait, I think, I said – who hasn’t wanted to wait until we had more data before we embarked on that actually I’m thinking that was the decision that we have to make next year. But we were able to make it this year and modestly increase our strength. As we start to develop a product there, I think, we’ve said the bigger market is that that area. But, again, we’re collecting great data from the current procedures that we are going on, now over 800 procedures.

Okay, that’s helpful. I just had a couple follow-ups on our power products. Then you mentioned that the business in the back-half of the year is – in the back-half of the fiscal year is going to be a quite a bit worse maybe previously imagine. I guess, are you expecting it to get sequentially worse on a revenue basis from what we’re seeing here in the fiscal second quarter?

Yes.

Okay. And then I think in, I guess, in response to Joe’s question on your expectation for fiscal 2017 revenue out of Power Products may be coming in between 2015 and 2016, those are some pretty wide upgrades, as it looks like. So, I guess, just given the volatility in that segment and how much of a variance driver that’s been to your consolidated business. The only thing you can say to maybe help better manage expectations there from a revenue and profitability perspective, as we think about next year?

And I realize those bookings that it is a matter of quite live. It’s not a particularly predictable business. We said that many times in the past. It’s hard to predict one quarter to the next. At this point, if we assume no further deterioration of this base business and with the return of its big data customer to a degree, I wouldn’t model that anyways near whether it’s a, ran in our fiscal 2015, and we’ll – we should see a increased revenues over what we exhibit this year. I’m reluctant to give anymore color on that, because oil and gas is down, I think, it’s safe to say, it’s going to continue to be down. So we’re really now just starting to look at, I mean, where do we think that business will be in the next six to 12 months. So it’s very hard to answer right now, jimmy.

Okay. I appreciate the effort, and thanks a lot for the time.

All right. Thank you.

Thank you. The next question is from Bob Evans of Pennington Capital. Please go ahead.

Good morning, and I apologize if you’ve already answered this. But it looks like you generated strong free cash flow again this quarter and used much of it to buy back stock. I assume, give us your thoughts just going forward, I assume, you would continue to be more aggressive buyers of your stock able to decline today?

Sure. Yes, we have a $100 million authorization, and now we have the abilities in building that that level. So we would certainly invest. And I…

Okay. Thank you.

Thank you.

Thank you. I will now turn the conference back over to management for any closing comments.

Well, thank you, everyone, for participating today, and wish everyone a very safe and pleasant holiday season. Good day.